Unique financing moving Texans into first homes

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The Texas Department of Housing & Community Affairs (TDHCA) has said it is using a relatively new financing strategy to support affordable housing and first-time homebuyer programs.

The TDHCA, like many other state housing finance authorities (HFAs), is issuing mortgage-backed pass-through securities to keep financing costs low and mortgages competitive amidst ultra, Federally-induced low interest rates, according to Tim Nelson, director of bond finance at TDHCA.

The new financing strategy has helped states like Texas to continue offering first-time homebuyer programs that incentivize buyers with 0% financed down payment and closing cost assistance. In essence, FHA’s 3.5% down payment requirement is financed under a second lien at no interest, due upon sale of the home, according to Eric Pike director of TDHCA’s homeownership division.

The program, titled, “My First Texas Home” has so far approved over 100 lenders across the state who have originated nearly US$ 250m in loans, according to Nelson. And they are shooting for another US$ 350m, roughly, he added.

It has been difficult for HFA’s to compete with conventional loans backed by Freddie Mac and Fannie Mae, according to Moody’s Investor’s Service report “The New Pass-Through Bond Issuance Strategy is Credit Position for HFAs”.

Traditionally, HFA’s issued tax-exempt mortgage-backed securities, or revenue bonds, to finance their mortgage programs, which were sold to the public and had final maturities. Traditional MBS allowed HFAs to originate at attractive prices because there was an associated tax benefit for investors, according to the Moody’s report.

After the financial crisis, traditional MBS rates rose due to volatility in the housing market and the new mortgage backed security (MBS) pass-through structure avoided those costs. HFAs turned to pass-through securities that were tied to one bond with substantially lower cost-of-funds than traditional MBS.

Approved lenders are encouraged to offer the “My First Texas Home” program, although they are likely to make slightly less per loan than conventional mortgages, Nelson admitted. They should want to offer the program because it supports affordable housing and community reinvestment, he said.

Approved lenders must have a relationship already set up with US Bank, too, who is the official servicer of all of the program’s mortgages, Nelson added.